Policy U-turn as debt piles up

PUBLISHED : Wednesday, 27 June, 2012, 12:00am
UPDATED : Wednesday, 27 June, 2012, 12:00am


National lawmakers have made a policy U-turn, barring local governments from directly issuing bonds as concerns mount over their runaway debts.

The draft revision says local governments cannot issue bonds unless otherwise stated by the State Council. The U-turn came in the second reading of the budget law and was discussed by the standing committee of the National People's Congress (NPC) yesterday in a panel meeting.

The revised version is different from the first reading at the end of last year, which allowed local governments to issue debt, subject to a cap.

At present, local governments are banned from directly selling bonds.

With local government debt piling up to about 10.7 trillion yuan (HK$13.1 trillion) by the end of 2010 - or 27 per cent of gross domestic product - Beijing has since last year been taking steps to allow debt financing for some provinces and municipalities.

The move highlights the central government's concern over the solvency of its indebted local governments - and the implications for social stability at a time when the European debt crisis threatens to put the brakes on China's economy.

Hong Hu, a deputy director of the NPC law committee, said at the panel meeting that local government debt deserved 'high attention' as it had risen substantially in recent years, China News Service reported.

Local governments and their financing vehicles borrowed heavily from banks to fund construction projects as part of Beijing's four trillion yuan 2008-09 stimulus package to counter the global financial crisis.

Audits later found that many of the projects had not generated enough cash to repay the loans. And some local governments have found it difficult to make ends meet as land sales - a key source of revenue - have slumped since Beijing imposed curbs to cool the property market.

'Local governments should strictly avoid deficits. Their debts should be under stringent supervision,' Hong was quoted by China News Service as saying.

Beijing tried to tackle a financing shortfall for public projects last year by allowing some local authorities to sell bonds directly - for the first time in 17 years - under a pilot scheme.

But Professor Ma Guoxian, director of the public policy research centre at the Shanghai University of Finance and Economics, said that although the pilot scheme was a step towards allowing local governments to sell debt, the ultimate repayment liability still rested with Beijing.

'It wasn't a big difference from the previous practice of the central government issuing debt on behalf of local governments. The pilot scheme only changed the selling procedure,' Ma said. The change in the draft law's second reading showed many people still preferred Beijing to take responsibility for government debt, Ma said.

'China is not a federal republic. Local governments should not have more rights [to issue debt] - otherwise we'll see a repeat of the European debt crisis in China,' he said.

Economists have argued the local authorities should be able to sell bonds themselves to ease the burden on banks, their main creditors, and improve transparency. It is not known when the NPC will pass the revision - it can take several readings.


Analysts see annual economic growth falling to this rate in the second quarter•8.2 per cent for 2012 - the lowest since 1999